By JACK KASKEY
Third Point, the hedge fund led by billionaire Daniel Loeb,
took a stake in Dow Chemical and called for a spinoff of its
business to improve
Third Points stake in Dow is its largest current
investment, the hedge fund said in a letter to investors. Dow
should hire external advisers to review its strategy and the
potential benefits of a spinoff, Third Point said.
While Third Point has been talking with Dow since late last
year, those discussions havent included the chief
executive officer or board members of the company, said a
person with knowledge of the matter. The funds stake
has a value of about $1.3 billion, the person said, asking
not to be identified as the information is private.
Dows share performance has lagged behind competitors
that are more focused on petrochemicals
, such as
LyondellBasell and Westlake Chemical, as new drilling methods
in US shale formations unlock an abundance of natural gas.
Shale gas has slashed costs for chemical makers such as Dow
that use gas both as a raw material and to power factories.
We believe the benefits from a spinoff, including
financial uplift from operational improvements at Dow Petchem
Co. and the potential valuation uplift from increased
business focus and disclosure, far outweigh the supposed integration
Point said in the letter.
Dow jumped 6.6% on Tuesday to $45.93 at the close in New
York, the biggest gain in more than two years.
In nine years leading the company, Dow CEO Andrew Liveris,
59, has tried to boost profit by focusing on specialty
businesses such as pesticides, genetically modified seeds,
paint ingredients and electronics. He tried to sell a 50%
percent stake in the plastics unit to Kuwait, a deal that
failed in 2009 amid the financial crisis.
The tables have turned on Dow as US shale gas has increased
earnings from petrochemical
s, Third Point said
in the letter. Petrochemicals in most of the world are made
from naphtha, an oil derivative whose price reflects a
tripling of oil prices since the end of 2008, widening the
advantage of US gas-based production, according to
Dows current petrochemical strategy seems
misaligned with the changed landscape, Third Point said
in the letter.
Cost cuts and improved operations in the petrochemicals
business could add
several billion dollars to earnings before
interest, taxes, depreciation and amortization, Third Point
said. That would boost petrochemical Ebitda to more than $9
billion, more than the whole company currently earns, Third
Dow management and directors constantly look for ways to
increase shareholder value and competitiveness, Rebecca
Bentley, a Dow spokeswoman, said.
We welcome all constructive input with a common goal of
enhancing long-term value, Bentley said. We
intend to continue an open dialog to further enhance value
for all of our shareholders.
-focused Dow spinoff
would generally include the performance-plastics,
performance-materials and feedstock
s- and-energy units,
Third Point said. Those businesses had $37.9 billion of
revenue in the 12 months through September, or 67% of
Dows $56.6 billion of sales, according to data compiled
Breaking up Dow would help unlock shareholder value, Hassan
Ahmed, a New York-based analyst at Alembic Global Advisors
who recommends buying the shares, said in a note.
The shale gas advantage probably has doubled the value of the
plastics business since 2008 to $38 billion, while the
agriculture unit is worth $12 billion and Dows joint
ventures are worth $10 billion, not much less than the
current value of the entire company, he said.
The market does not seem to be assigning much value at
all to the expected growth at the company, or the $35 billion
in sales and $4 billion in Ebitda generated by the
companys more specialty businesses,
Liveris said in October that he plans to divest $3 billion to
$4 billion of assets within two years as the company seeks to
move away from less profitable commodity chemicals and focus
on value-added products. The largest unit targeted for sale
is chlorine, which isnt a petrochemical
Dow joins competitors such as DuPont in facing pressure from
activist investors. Nelson Peltzs Trian Fund
Management, a New York-based hedge fund, last year took
stakes in DuPont, which now plans to spin off the unit that
makes titanium dioxide, a white pigment used in paint and
plastics. Ashland announced plans to sell its water-chemicals
unit after Jana Partners bought a stake.
Dow climbed 27% in the 12 months through Jan. 17, compared
with a 23% gain in the Standard & Poors 500
Chemicals Index. Before Tuesday, Dow fell 4.2% since the last
trading before Liveris became CEO on Nov. 1, 2004, while the
S&P 500 Chemicals Index more than doubled.
Dow was valued last week at about 22 times its trailing
12-month earnings per share, according to data compiled by
Bloomberg. Chemical companies that have market values
exceeding $20 billion fetch a median price-earnings ratio of
20, the data show.
Dow earned 6.7 cents of operating profit for every dollar of
sales in the 12 months that ended in September, among the
lowest margins of its peers, data compiled by
Bloomberg show. The company is scheduled to report
fourth-quarter earnings Jan. 29.
Third Point also urged Dow to consider a meaningful
share buyback to offset shares that will one day be
issued to Warren Buffetts Berkshire Hathaway and the
Kuwait Investment Authority when they convert $4 billion of
Dow preferred securities.
Loeb also disclosed the fund had amassed about 9.5% of Ally
Financial through a series of private transactions. The fund
reported an increased stake in Intrexon, the synthetic
biology services provider that Third Point had invested in
privately since 2011 and which had an initial public offering
In 2013 Loeb took activist stakes in new targets including
Sony, where he called for a partial sale of the Japanese
companys entertainment unit, CF Industries, where he
agitated for a larger dividend, and Sothebys, where he
pushed for new leadership and more efficient operations.